Natural gas proves to be an energy game-changer

Natural gas proves to be energy game-changerIts sudden abundance is a boon to many and a pain to its competition

JONATHAN FAHEY, ASSOCIATED PRESS

Published 5:30 am, Monday, October 18, 2010

NEW YORK — By unlocking decades' worth of natural gas deposits deep underground across the United States, drillers have ensured that natural gas will be cheap and plentiful for the foreseeable future. It's a reversal from a few years ago that is transforming the energy industry.

The sudden abundance of natural gas has been a boon to homeowners who use it for heat, local economies in gas-rich regions, manufacturers that use it to power factories and companies that rely on it as a raw material for plastic, carpet and other everyday products. But it has upended the ambitious growth plans of companies that produce power from wind, nuclear energy and coal. Those plans were based on the assumption that supplies of natural gas would be tight, and prices high.

Billions of dollars' worth of plans to build wind farms and nuclear reactors have been delayed or scuttled, including Constellation Energy's Calvert Cliffs nuclear project in Maryland. The company signaled last week it was in peril because of higher-than-expected financing costs.

And coal power, already struggling under tighter environmental regulations, is now under even more pressure. Natural gas emits fewer dangerous chemicals and about half as much carbon dioxide as coal.

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The new natural gas discoveries, mostly beneath states in the East, South and Midwest, have kept prices remarkably low, even as demand has begun to come back since the end of the recession.

"We once thought we could face gas shortages and brownouts. Now we are facing an enormous oversupply of natural gas," said Fadel Gheit, senior oil and gas analyst at Oppenheimer and Co. "We have not scratched the surface of potential of gas in the U.S. and across the world."

The U.S. uses natural gas to produce 21 percent of its electricity. Coal is the dominant fuel, accounting for 48 percent of the electricity mix. By 2015, natural gas is predicted to reach 25 percent, while coal is expected to fall to 44 percent.

In the middle of the last decade, natural gas looked to be in short supply. Production in the U.S. was slowing, imports from Canada were rising and plans for importing liquefied natural gas from the Middle East and elsewhere were drawn up.

Natural gas, which had traded at about $2 per million British thermal units in the 1990s, hit nearly $15 in 2005. It is now about $3.50, driven lower by reduced industrial demand and rising production by those learning to make a profit from shale gas at ever lower prices.

Shale gas fields

Starting in about 2006, after decades of work, natural gas drillers like Devon Energy, EOG Resources and XTO Energy, now owned by Exxon Mobil Corp., perfected methods first tried in 1981 that now allow them to cheaply drill down and then horizontally into gas trapped in formations of shale never before thought accessible.

In just a few years, a number of shale gas fields around the country are suddenly producing gas, including the Barnett field in Texas, the Fayetteville field in Arkansas, the Haynesville field in Louisiana and the massive Marcellus field that stretches from Western New York through Pennsylvania, Eastern Ohio and West Virginia.

A recent study by the Massachusetts Institute of Technology on the future of natural gas found that 80 years' worth of global natural gas consumption could be developed profitably with a gas price of $4 or below.

Plans for nuclear plants and wind farms were made under the assumption that gas prices would average $7 to $9. At that level, electricity prices would be high enough to make wind and nuclear power look affordable. Now many of these projects suddenly look too expensive.

Plans for three dozen new nuclear plants were drawn up in the middle of the last decade, and the nuclear industry hailed what it called a renaissance. Lawmakers, aiming to help stave off high electricity prices, authorized an $18.5 billion loan guarantee program to help the nuclear industry begin building new plants after two decades of inactivity.

Now almost all of those plans have been delayed or shelved. Even companies that are finalists for federal loan guarantees, NRG Energy and Constellation Energy, announced recently that they have nearly stopped spending on their projects.

Constellation announced recently that it was giving up on its loan guarantee application because the federal government's terms were too restrictive. Analysts say low natural gas prices are making the project uneconomic. NRG CEO David Crane said he will not pursue the company's two-reactor project in South Texas if natural gas prices stay low, even if his project is offered a loan guarantee.

"Clearly $4 gas challenges the economics of just about every other form of electricity generation," says Richard Myers, a vice president at the Nuclear Energy Institute, an industry group. "If you take a snapshot, today, it looks bleak."

Wind power waning

The wind industry is also suffering. Antonio Mexia, chief executive of the Portuguese utility EDP, which is the third-largest wind power producer in the world and owner of Houston-based Horizon wind, said in a recent interview that the company plans to reduce wind investments by 75 percent in the U.S. between this year and next.

Nationwide, the wind industry installed enough wind turbines to supply electricity to 2.6 million homes in 2009, a record. This year wind turbine construction will likely fall 40 percent, and next year Mexia predicts that it could fall again, by as much as half. Federal subsidies for renewable energy projects reduce costs by some 30 percent, but that is not enough to help the wind-power industry compete with natural gas these days, he says.